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Monday, January 14, 2013

Some Thoughts on James Buchanan

When I think of James Buchanan, who died last week, I remember hearing him answer a question at a conference in the late 1980s, not long after he had won the 1986 Nobel prize. A questioner with stars in his eyes asked how Buchanan had been able to write, not a few dozen journal articles, but a series of more than 30 book-length tomes like The Calculus of Consent during his career. (In fact, Buchanan's work was later collected into 20 volumes.) Buchanan paused for a moment, the very image of a courtly, soft-spoken, silver-haired Southern professor, and then gently drawled: "Apply butt to chair." Words to live by!

I had barely heard of Buchanan's work when he won the Nobel prize in 1986: it certainly didn't have much prominence in my undergraduate or graduate studies in economics. But Buchanan contributed an article, "Tax Reform as Political Choice," to the first issue of my own Journal of Economic Perspectives in Summer 1987. (As with all JEP articles from the first issue to the most recent, it is freely available on-line courtesy of the American Economic Association.)

At that time, Buchanan had just presented his Nobel lecture, "The Constitution of Economic Policy,"
which offers an overview of his arguments about how economists should do policy analysis. He quoted the great Swedish economist Knut Wicksell (1851-1926) who wrote things like: "[N]either the executive nor the
legislative body, and even less the deciding majority in the
latter, are in reality ... what the ruling theory tells us they
should be. They are not pure organs of the community with no
thought other than to promote the common weal. ... [M]embers of the representative body are,
in the overwhelming majority of cases, precisely as interested in
the general welfare as are their constituents, neither more nor
less."

In a similar spirit, here's Buchanan in his own words: "Economists
should cease proffering policy advice as if they were employed by
a benevolent despot, and they should look to the structure within
which political decisions are made. ... I called
upon my fellow economists to postulate some model of the state,
of politics, before proceeding to analyse the effects of
alternative policy measures. I urged economists to look at the
"constitution of economic polity," to examine the rules, the
constraints within which political agents act. Like Wicksell, my
purpose was ultimately normative rather than antiseptically
scientific. I sought to make economic sense out of the
relationship between the individual and the state before
proceeding to advance policy nostrums."

The first issue of JEP back in 1987 had a symposium on the 1986 Tax Reform Act, and in his JEP paper, Buchanan applied his perspective to how one might think about the passage of a largely revenue-neutral tax reform that sought to reduce special deductions, credits, and deductions, and to use the revenue saved to reduce marginal tax rates.

Buchanan argued that the "political agents" who set tax policy in general prefer higher taxes, because they like to have control over more resources. They also like to offer tax breaks to special constituencies, who reward them with political support. But as the political agents offer tax breaks to special constituencies, they need to ratchet up tax rates on others--and as those rates get higher, it becomes harder to offer still more tax breaks. From the perspective of these kinds of political agents, the 1986 tax reform could thus be interpreted as a chance to wipe the slate clean: that is, start over again with lower tax rates and fewer tax breaks. But this just meant that the political agents could then again start their pattern of offering tax breaks and pushing up rates all over again.

"The 1986 broadening of the tax base by closing several established loopholes and shelters offers potential rents to those agents who can promise to renegotiate the package, piecemeal, in subsequent rounds of the tax game. The special interest lobbyists, whose clients suffered capital value losses in the 1986 exercise, may find their personal opportunities widened after 1986, as legislators seek out personal and private rents by offering to narrow the tax base again. In one fell swoop, the political agents may have created for themselves the potential for substantially increased rents. This rent-seeking hypothesis will clearly be tested by the fiscal politics of the post-1986 years. To the extent that agents do possess discretionary authority, the tax structure established in 1986 will not be left substantially in place for decades or even years."

Over time, Buchanan's prediction has held true: new tax breaks have been created, and marginal tax rates have been pushed back up to pay for them. Thus, one common proposal for dealing with the disturbing prospects of long-run budget deficits is to raise additional revenue by limiting many tax breaks, and then using some of the revenue for lower marginal tax rates and some for deficit reduction. For previous posts of mine about such proposals, see my February 2012 post on "Tax Expenditures: A Way to End Budget Gridlock?" or my August 2011 post on "Tax Expenditures: One Way Out of the Budget Morass?"

Of course, Buchanan's work is a continual reminder that even when economists are involved in drawing up some plans for a tax reform that would broaden the tax rates and lower the base, political agents will be the ones who actually draw up the plan, vote on it, and determine how much it changes each year. This insight about the centrality of politics is perhaps obvious to the average person, but many of us who focus on the economy can lose sight of it. Buchanan's work is one reason that in my own Principles of Economics textbook (available here), I follow up all the chapters on what can go wrong in markets--monopoly, externalities, public goods, inequality, incomplete information, all the rest--with a chapter on political economy. As a teacher, I want to encourage students to be thoughtful skeptics of how markets work, but I also want them to be equally skeptical about the extent to which political agents will implement the sort of economically enlightened policies that will actually address the problems of markets.

Buchanan's obituary in the New York Times is here. It closes with a great line from Buchanan, who once said: “I have faced a sometimes lonely and mostly losing battle of ideas for
some 30 years now in efforts to bring academic economists’ opinions into
line with those of the man on the street. ... My task has been
to ‘uneducate’ the economists.”